Get Started with Trading CFD's on Forex

What is Forex?

Forex (short for Foreign Exchange and also known as FX) market is the global market where currencies around the world are traded. Forex can be traded from virtually anywhere around the world, because most people around the world use currencies for daily life and for conducting business across borders.

Before diving into the world of CFDs on Forex, it will be good to know that CFDs are leveraged products that can quickly lead to a loss of your capital, which it is why it is important that only people with financial market knowledge and experience should consider trading this.

Why trade CFDs on Forex?

Currencies are one of the most liquid and highly-traded assets in the world. Because they are so essential for business and daily life, the trading volume for currencies is in the trillions!

This massive trading volume allows for a lot of volatility, which means there will be more opportunities to enter trades (but also risks). You could also exit a trade with profit (or loss) in just minutes, especially during news releases. This makes Forex trading suited to traders who want to see faster returns and not have to hold a position for a long time, possibly even losing sleep over it.

Another reason to trade Forex is that it doesn't run on a single country's trading days. Instead, Forex is tradeable 24 hours a day, 5 days a week. This means more flexibility, so you can log in and trade whenever you have time.

How do I trade CFDs on Forex?

Forex is not traded on a centralised exchange; it is traded over the counter. The easiest way to access the Forex market is through brokers who offer Forex CFD trading, such as Plus500. Simply sign up for an account and start trading, but please make sure you fully understand the risks involve in trading with CFDs!

“Forex is tradeable 24 hours a day, 5 days a week. This means more flexibility, so you can log in and trade whenever you have time.”

How does CFDs on Forex trading work?

CFDs on Forex trading works similarly to other assets, albeit with one difference: you can buy and sell instead of just buying. This can be done without special contracts as well.

In CFDs on Forex trading, just like exchanging currency when you travel to another country, you buy one and sell the other, or sell one and buy the other. That is why currencies are traded as currency pairs, for example EUR/USD, also known as "the Euro".

When you select to Buy EUR/USD, you exchange Euros for US dollars. When you close the trade, you exchange US dollars back for Euros, and your profit or loss will be decided by the difference between your entry and exit prices, multiplied by the lot size. Currency fluctuations are typically counted in "pips", or points in percentage.

For example, if EUR/USD moves from 1.0000 to 1.0010, that's a 10-pip move. Trading a $10,000 position (1 mini lot) on a 10-pip move would make you a total of $10,000 * 0.0010 = $10. On the other hand, trading a $100,000 (1 standard lot) position on the same move would make you $100,000 * 0.0010 = $100, a far more attractive return for your time spent trading.

Because currency value fluctuations are so small (and they have to be, otherwise the global financial system would be in total chaos), a large number of units of currency must be traded in order to capture any meaningful return from the currency movement.

However, it is impractical to amass $100,000 to trade Forex on a 1:1 ratio. That is where leverage in CFD trading comes in.

Leverage in CFDs on Forex

Leverage in CFDs on Forex works a little differently as compared to stocks.

Leverage in CFDs on Forex can come in ratios such as 1:50 (1 dollar in your account allows you to trade 50 US dollars, or the equivalent, for another currency), or more in certain jurisdictions that allow higher leverage. While this seems overwhelmingly huge at first glance, these ratios are common in Forex trading because of the need to hold a large amount of currency in order to capture gains from the currency movements.

That said, there are ways to control risk posed by volatility and leverage in Forex.

Risk controls in Forex

There are also a few ways to control the risks posed by Forex volatility and leverage.

Firstly, use a broker that has negative balance protection. Plus500 offers this protection and will perform margin calls to prevent your account from falling into a negative balance. This means that you cannot lose more than the funds in your account, so you will not be in debt to the broker in the event that you end up with a negative balance.

Secondly, set a position size and stop-loss level that does not exceed 2% of your account size. This ensures that you have at least 50 trading opportunities, and it is unlikely that all of them will be losing trades*.

*Please note this is not a trading advice

Lastly, use a strategy that adapts to Forex news. Currencies tend to be volatile at news releases. If you want to take advantage of that, use a strategy for trading news releases. Otherwise, you may want to consider using a smaller position size to reduce the risk posed by sudden fluctuations due to news.

For more information, please visit https://www.plus500.com.sg.

Note: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail investor accounts lose money when trading CFDs. You should consider whether you can afford to take the high risk of losing your money.

 

About Plus500

Plus500 is a leading provider of Contracts for Difference (CFDs), delivering trading facilities on shares, forex, commodities, ETFs, options and indices, alongside innovative trading technology. Plus500SG Pte Ltd (UEN 201422211Z) holds a capital markets services license from the Monetary Authority of Singapore for dealing in securities and leveraged foreign exchange trading (License No. CMS100648-1) and a Commodity Broker's License (License No. PLUS/CBL/2018) from Enterprise Singapore. The company currently offers a portfolio of over 2,000 instruments. Plus500SG Pte Ltd is a subsidiary of Plus500 Ltd, a company listed on the AIM section of the London Stock Exchange (LSE).

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